Big Tech’s 20% Surge Hits a Wall of Rising Energy Costs

“AI or die.” That was International Monetary Fund Managing Director Kristalina Georgieva last week, telling a panel at the IMF/World Bank spring meetings in Washington how she views the challenges businesses, industries, and economies around the world face given the transformative powers of artificial intelligence.

Her comments also apply to the stock market. US Big Tech suffered a substantial wobble and repricing in the first quarter, but has roared back in the last three weeks, with market conviction in the AI productivity boom seemingly stronger than ever.

Investors will get a sense of whether this optimism is justified this week, with Tesla, the first of the “Magnificent Seven” megacaps to report, releasing first-quarter results on Wednesday. IBM and Intel also report this week.

Markets are clearly expecting more good news. US stocks have shrugged off the Iran war and the energy supply shock to hit new all-time highs.

The Nasdaq on Friday clocked its 13th daily gain, its longest winning streak since 1992, rising nearly 20 percent in the process. Should the rally extend through Monday, it will be the best run since June 1987.

The S&P 500 is also up 13 percent in the last three weeks. The rebound has been highly unbalanced, however, driven by only a handful of Big Tech firms. Indeed, less than 10 percent of the S&P 500 stocks are trading at 52-week highs, according to Liz Ann Sonders at Charles Schwab.

The S&P 500 tech sector is now worth nearly 35 percent of the overall index’s market cap, closing in on October’s record 36 percent.

The tech and communications services sectors’ combined market cap is now less than a percentage point off October’s record 46 percent market share.

Concentration risk is suddenly back on the table. Any downward shift in sky-high AI sentiment could have an outsized impact on the widermarket.

And with global energy prices up the most in five years, there are worries that the hyper-bullish earnings outlook for Big Technow a highly energy-intensive sectorcould sour.

While economists at BNP Paribas reckon the AI boost will “comfortably” overshadow all negative shocks over the next several years, in the near term - this year and next - negative shocks are likely to carry more weight. “If current (AI) capex pledges are met in full, this could significantly boost power prices, diminishing the positive productivity effect from AI deployment,” they wrote last week.

These capex pledges are hugesome $635 billion this year from hyperscalers Microsoft, Amazon, Alphabet and Meta alone, and over $800 billion in total, according to Morgan Stanley. The numbers on the energy demand side are also eye-popping.

In November, Morgan Stanley energy analysts estimated total US data center power demand through 2028 at 69 gigawatts, warning of a potential 44 GW shortfall.

They now see that demand reaching 80 GW, with the potential shortfall rising to 55 GW. For context, 10 gigawatts could power 10 medium-sized nuclear power plants. With AI-driven demand for energy going up and supply constrained, the prices Big Tech must bear will undoubtedly be higher than expected. This could eat into the huge profits baked into market expectations for hyperscalers.

Or, as Melissa? Otto, head of research at S&P Global Visible Alpha, told Reuters last month, it could even hinder their capex plans altogether.